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Chapter 13 Accounting For Government Grants and Disclosure of Government Assistance

This document summarizes the accounting treatment of a government grant received for the purchase of a machine over 4 years. It shows the profit and loss and balance sheet under two methods: (1) treating the grant as deferred income that is recognized over the life of the machine, and (2) reducing the cost of the asset by the grant amount. Under both methods, the total profit over 4 years is $120,000. However, the balance sheet treatment differs in terms of the non-current asset value and deferred income/accumulated depreciation balances each year. The document notes that cash flows from the asset purchase and grant receipt are often disclosed separately due to their significance.

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194 views

Chapter 13 Accounting For Government Grants and Disclosure of Government Assistance

This document summarizes the accounting treatment of a government grant received for the purchase of a machine over 4 years. It shows the profit and loss and balance sheet under two methods: (1) treating the grant as deferred income that is recognized over the life of the machine, and (2) reducing the cost of the asset by the grant amount. Under both methods, the total profit over 4 years is $120,000. However, the balance sheet treatment differs in terms of the non-current asset value and deferred income/accumulated depreciation balances each year. The document notes that cash flows from the asset purchase and grant receipt are often disclosed separately due to their significance.

Uploaded by

samuel_dwumfour
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Chapter 13 Accounting for Government Grants and Disclosure

of Government Assistance
Answer Exercise 1
The results of the company for the four years of the machines life would be as
follows.
(a)

Treating the grant as deferred income

Profits before
depn.
Depreciation
Grant

Year 1
$
grant & 50,000

Profit

Year 2
$
50,000

Year 3
$
50,000

Year 4
$
50,000

Total
$
200,000

(25,000) (25,000) (25,000) (25,000) (100,000)


5,000
5,000
5,000
50,000 20,000
30,000

30,000

30,000

30,000

120,000

Balance sheet at year end (extract)

Non-current asset at cost


Depreciation

75,000

50,000

25,000

15,000

10,000

5,000

Profits before grant & depn.


Depreciation*

Year 1
$
50,000
20,000

Year 2
$
50,000
20,000

Year 3
$
50,000
20,000

Year 4
$
50,000
20,000

Total
$
200,000
80,000

Profit

30,000

30,000

30,000

30,000

120,000

Deferred income
Government grant
(b)

Year 1
Year 2
Year 3
Year 4
$
$
$
$
100,000 100,000 100,000 100,000
(25,000) (50,000) (75,000) (100,000)

Reducing the cost of the asset

A13-1

* The depreciation charge on a straight line basis, for each year, is 1/4 of
$(100,000 20,000) = $20,000.
Balance sheet at year end (extract)

Non-current asset at cost


Depreciation

Year 1
$
80,000
20,000

Year 2
$
80,000
40,000

Year 3
$
80,000
60,000

Year 4
$
80,000
80,000

60,000

40,000

20,000

Whichever of these methods is used, the cash flows in relation to the purchase of the
asset and the receipt of the grant are often disclosed separately because of the
significance of the movements in cash flow.

A13-2

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